BRIEF
by
Petroleum Industry Research Foundation, Inc
New York 17, New York
to
The Director,
Office of Emergency Planning
Washington 25, D. C.
SUBJECT:
Comments on the Petitions filed by The American Maritime Association
and the Committee of American Tanker Owners
June 28, 1962
INTRODUCTION
The Petroleum Industry Research Foundation, Inc. is engaged in
economic research and the dissemination of information concerning
the oil industry.
Our Board of Directors consists of independent
East Coast oil marketers and our work frequently reflects the interests and problems of the oil marketers and consumers on the U. S.
East Coast.
Since the great bulk of U. S. oil imports is delivered and consumed at the East Coast, much of our work has always been concerned
with the problem of oil imports.
We have testified on this subject
before Governmental Agencies and Congressional Committees and have
also submitted briefs to your agency.
At this time we would like to comment on two petitions recently
submitted to your office by the American Maritime Association and
by the Committee of American Tanker Owners.
Both of these petitions
request that a certain share of U. S. oil imports be transported in
American - flag tankers.
In order to avoid repetition, we have limited
our comments primarily to the petition by the American Maritime
Association (AMA), whose proposal is the less extreme of the two.
However, all our arguments apply equally to the petition submitted
by the Committee of American Tanker Owners (CATO).
The Petroleum Industry Research Foundation believes that the
petitions by the AMA and CATO should be denied, since (a) they would
add still further to the burden cf the oil imports1 restrictions
which East Coast refiners, marketers and consumers must now bear,
(b) the domestic tanker fleet does not need the special protection
requested in the petitions, and (c) the national security is more
likely to be harmed than helped by the recommendations in the two
petitions.
-2THE COST OP THE AMA PROPOSALS
Under the AMA proposals $Q?o of all crude and unfinished oil
imported east of California by companies with import quotas of at
least 10,000 barrels daily would have to be delivered by tankers
registered under the U. S. flag and having coastwise privileges.
In
the first half of 1962 the eighteen companies in this category imported 533,215 barrels daily, or 76^ of all licensed crude oil imports
delivered east of California. Virtually none of these imports were
brought in by U. 3. flag tankers. To comply with the AMA's proposal
would therefore mean a transfer of about 265,000 barrels daily of
imports from foreign flag to U. S. flag tankers. The AM brief
estimates that this transfer would add 16# per barrel to the delivered
cost of the affected imported crude oil. On the basis of this
estimate, the direct annual cost of the AMA's proposal would be about
15-5 million dollars.
However, this figure represents only a small part of the additional cost.
In 1961 U. S. flag tankers delivered a total of 727.8
million barrels of domestic crude oil and products to the U. S. East
Coast.
The AMA proposal would require these tankers to carry an
additional 265,000 barrels daily, or 96.7 million barrels annually,
of foreign crude oil in 1962. This would cause a sudden increase in
the demand for U. S. - flag bottoms of 13.3& assuming all of the
affected foreign crude to be of Caribbean origin.
There can be no
doubt that such an increase in demand would raise the entire freight
rate schedule of domestic flag tankers.
While the resulting increase
is of course not subject to exact determination at this time, it is
a fact that tanker rates tend to fluctuate widely in response to
relatively small changes in demand. Thus between January 1st and
June 15th, 1962 spot tanker rates for cargo from the Gulf Coast to
-3New York have ranged from a low of ATRS minus 30$ (28.695 per barrel)
to a high of ATRS plus 20$ (43,9^ per barrel).
An increase in tanker demand of the magnitude proposed by the
AMA would certainly be expected to bring the rate at least up to
ATRS plus 10$, or 44.1$ per barrel, which was reached and exceeded
on several occasions in the past 12 months when demand was slightly
more brisk than normal.* For the transport of the 96-7 million
barrels of foreign crude from the Caribbean area to the U. S. East
Coast would require the equivalent of 26T-2 tankers, or a total
volume of about 440,000 deadweight tons.
This would be equal to
three-quarters of the total inactive domestic tanker tonnage, as of
March 31, 1962 (See table Page 5 ), or virtually all the readily
available inactive tanker tonnage.
The utilization of this much
additional tonnage tfould certainly raise the average domestic
tanker rate to the level assumed herein but probably even higher.
Since the average domestic tanker spot rate during the first
5^ months of 1962 (and also during 1958-1960) was about 34.1^ per
barrel (equal to ATRS minus 19$), the assumed higher rate would
mean a 10.6^ per barrel increase for all domestic oil shipment by
tanker to the U. S. East Coast, as is shown in the following computations
TANKER SPOT RATES U. S. GULF COAST - EAST COAST
Average rate January 1-June 15, 19&~2—ATRS'minus 19$. .34.1^ per barrel
Assumed rate under AM proposal
Indicated increase
ATRS plus
10$..44.1<L per barrel
10. 6^ per barrel
^During the cold spell of January-February 1961, the domestic tanker
rate ranged from ATRS plus 12.5$ to ATRS plus 42.5$.
-4Based on last year's tanker shipments of 727-8 million barrels
of domestic oil to the East Coast the annual cost of this increase
would run to about 77 million dollars.
Thus the gross cost of the
proposed allocation of U. S, - flag tankers for import shipments
would be as follows:
Increase due to higher tanker rates of domestic oil shipments.:!,..
$77-0 million
Increase due to carrying imports at current U. S.-tanker rates...,
(as per AMA estimate)
$15-5 million
$92.5 million
Actually the increase due to carrying imports in U. S. -flag
ships would be more than the $15-5 million assumed above, since these
reflect only the current differential between U. S, and foreign tanker
rates but not the differential resulting from the presumed rise in
the domestic tanker rate.
However, this additional cost might be
offset by a slight decline in foreign-flag tanker rates due to the
shift from foreign to U. S. flag ships.
It should be noted that the figure of $92.5 million is equal to
6 times the maximum cost computed by the AMA in its petition.
The
difference lies in the fact that the AMA's computation takes account
only of the existing differential between foreign and domestic tanker
rates but ignores that the proposed increase in the employment of
U. S. -flag tankers would inevitably cause a significant rise in these
rates.
Of course, if the higher tanker employment should lead to a higher
level of U. S. tanker construction the domestic freight rate may
eventually drop back to its present level. But even under the most
favorable circumstances this would not happen for several years.
During these years, oil importers, refiners and marketers on the East
-5Coast and, in the final analysis, also consumers would have to bear
the full burden of the additional transportation costs.
SIZE AND OPERATING CONDITIONS OF THE U. S. - FLAG TANKER FLEET
According to official statistics the deadweight tonnage of privately owned U. S. tankers has not declined in the last 5 years but
has, on the contrary, exhibited a regular annual growth.
As the table
below shows, this growth has occured principally among actively
employed tankers.
The tonnage of temporarilly inactive and laid-up
vessels is currently lower than at any time in the last five years,
and so is the ratio of inactive to total vessels.
Employment of Privately-owned U. S. - Flag Tankers
(Plus inactive Nat'l Defense Reserve)
In thousands of deadweight tons
As of:
Active Vessels
Inactive Vessels
3/31/62
3/31/61
3/31/60 3/31/59
3/31/58
6,422
6,044
5,701
5,474
5,l8l
598
796
961
765
642
13.2$
16.9^
14.0$
12.4$
Inactive Vessels as % of
total private capacity
(National Defense Reserve
SOURCE:
y^%
1,011
1,038
1,015
899
684 )
Maritime Administration, U. S, Dept. of Commerce
As the preceeding figures show, for the five year period since
the Suez crisis the statistical evidence does not suggest that the
domestic tanker fleet has suffered due to competition from foreignflag tankers or from any other cause.
-6In fact, oil transportation by domestic tanker has consistently
expanded during the last several years according to the data shown
below.
This is due principally to the federal restrictions on oil
imports imposed in March 1959.
Under these restrictions imports
of crude and refined oil (other than the residual fuel oil) are held
to a fixed ratio of U. S. oil demands.
TOTAL TANKER SHIPMENTS OF DOMESTIC CRUDE OIL AND PRODUCTS TO THE U.S
EAST COAST
(thousands of bbls.)
-
••
1961
" . I960
" 1959
1958
727,821
706,521
682,450
669,676
SOURCE: U.S. Bureau of Mines
Inasmuch as U. S. Maritime legislation prohibits the employment
of non - U. S. -flag tankers in domestic oil transportation, U. S. flag tankers reap the full benefit of the oil import restrictions,
while being kept completely insulated from the pressure of foreignflag competition.
It may be added that though residual fuel oil imports are not
held to a fixed ratio to domestic demand, such imports do not affect
domestic tanker shipments of this product, since domestic residual
fuel oil Is strictly a by-product which falls off accidently in the
course of refining crude oil into such products as gasoline and
distillate oil. Hence the domestic production of residual fuel oil
does not depend on the demand for or the price of this product.
Consequently, imported residual oil does not displace the domestic
product which would be shipped to the East Coast In available
quantities regardless of the level of imports.
THE AMA PROPOSAL AND THE NATIONAL SECURITY
A. The Need for Spare Capacity
If the AMA proposal were put into effect it would have a negative
impact on the national security., both domestically and internationally,
The figures quoted on page 5 indicate that the total inactive U. S.
tanker tonnage (privately owned ships and national defense reserve)
currently equals only about 20^ of the total U. S. - flag tanker
capacity.
This percentage, which is approximately„in line with the
spare capacity of many U. S, industries,, provides a reasonable although by no means excessive - margin for emergency expansion.
However, if this margin were cut in half3 as would be the case if
the AMA proposals were adopted., the ability of the U. S. -flag tanker
fleet to respond to National emergencies would be greatly reduced.
B. The Effect on Soviet Tanker Chartering
As previously stated, the AM
proposal would cause unemployment
for about 440.,000 deadweight tons of foreign-flag tankers, assuming
that all substitution of foreign flag by U. S. - flag vessels would
occur in the Caribbean - U. S, run.
The companies primarily affected
by this development would be the independent foreign-flag tanker
owners who account for about TOfo of all free-world tankers outside
the U. S.
These companies who chart their vessels to oil shippers
at prevailing rates have for some years now operated at extremely
low freight rates.
In fact a number of their tankers is currently
being operated at a deficit and is kept active only because the cost
of dry docking the tankers is often higher than the loss sustained
in operating them at prevailing depressed rates.
Any additional
unemployment would of course cause a further deterioration of this
-8sltuation.
Soviet oil exports have greatly benefited from this world-wide
slump in tanker rates which has caused a number of independent freeworld tanker operators to charter their vessels to the USSR. The
importance of the availability of these free-world vessels to the
Soviet oil export trust can be gauged from the fact that while Soviet
oil exports currently account for about 6$ of total international
oil shipments, the Soviet tanker fleet accounts for only 2.2% of
the world's tanker fleet engaged in International trade.
The USSR
is therefore largely insufficient in tanker carrying capacity.
According to a Bureau of Mines paper this insufficiency is likely
to continue beyond 1965.*
Hence Soviet oil export ability is inversely related to the
utilization of the independent foreign-flag tanker fleet by freeworld nations.
The cut-back in foreign-flag tanker utilization pro-
posed by the AMA would therefore benefit Soviet oil export by making
additional free-world vessels at still lower rates available for
carrying Soviet shipments to other nations.
Presumably, this would
not be in the best interest of our national security.
CONCLUSION
The Office of Emergency Planning's predecessor organization,
the Office of Civil and Defense Mobilisation, has rejected on December
29, I960 proposals very similar to those recently submitted by the
AMA and CATO.** In our view, nothing has occured since then to justify
a change in the government's position adopted at that time.
#•*•##•##•*
* Development and Characteristics of the Soviet Tanker Fleet, statement
by Donald J. Frendzel, East European specialist, Bureau of Mines,
October 13, 1961.
**Since the proposal by CATO goes much further than the AMA's, the cost
and national security risk of the CATO proposal would be correspondingly higher.• _„ .